LAKE FOREST, Ill.—A Top 10 List of issues to watch for in 2021 when it comes to overdrafts is being offered to credit union leaders to help provide guidance and avoid costly mistakes.
This list, assembled by Moebs Services, which does extensive research into overdraft practices at financial institutions, is included in a report that pays particular attention to the risks to revenue.
Michael Moebs, economist and CEO at Moebs Services, said the cautionary list related to overdrafts differs from those in previous years, due largely to changing consumer behavior during the pandemic.
The company assembled its Top 10 List from consumer data gathered in November from 87,181 depository locations across the U.S. and from several of its own recent reports.
“We’ve put all of these road signs in one place because banks and credit unions need to be aware of how the overdraft landscape is changing,” said Moebs. “These are important issues to watch and address. The coronavirus has accelerated OD behavior change, creating a brave new world of overdrafts.”
Top Ten Issues
CFPB will Reinstate Obama Era Fines
Starting in 2011 and running through 2016, the Consumer Financial Protection Bureau collected over $10.8 billion in enforcement actions and fines for consumer relief, including ODs, as well as other service charges.
“The recently nominated CFPB director, Rohit Chopra, was there for the CFPB’s startup and witnessed first-hand what can be achieved with fines,” said Moebs. “Financial institutions need to batten down the OD hatches for regulation, especially with Reg E and opt-in practices. Refunding on contested OD transactions needs to be enhanced to ward off any possible class action lawsuits.”
OD Pricing $25 or Below Avoids Compliance Heartburn
COVID-19 spawned more banks than credit unions to reduce their overdraft pricing to $25 or below.
“Along with low OD price comes consumer-friendly pricing features, such as: caps on fees charged, di minimis levels of $10 or less to avoid an OD fee, and fee waivers for errors,” said Moebs. “These changes are viewed favorably by examiners, regulators and mainly consumers affected by their errors.”
Average OD Limit Base is $1,500
“The $500 average overdraft limit in place since 1998 does not meet the basic monthly needs of the consumer today,” Moebs told CUToday.info. “Larger limits help relieve error-prone consumer behavior, so penalty pricing of high fees and low limits can die with the virus. Consumers are willing to pay reasonable fees for good value.”
FICO as an OD Process, Not Just an OD Underwriting Tool
“Fair Isaac established the FICO score to avoid human decisioning,” observed Moebs. “FICO calculates risk, controls losses, and is tied to limits to assist with errors not penalties. Preventing overdraft losses requires human insight on the risk data to determine the process for automatic decision.”
Payday Lenders Have More Than 40% of the OD Market
“The median overdraft balance is $40 at the end of day. The national OD median price is $30. The national payday lender fee for a $100 advance is $18. Which would a consumer choose?” asked Moebs. “Give members or customers a reason to avoid payday lenders: provide better price, higher limits and better service.”
Payments Rule
COVID increased digital purchases with debit cards using mobile wallets in stores and online.
“Even in electronic payments errors are made,” noted Moebs. “The average American has short-term cash needs due to making errors with their cash. This need doesn’t disappear because overdrafts are disliked and penalized. ODs will not go away because of errors and cash needs.”
More Than 80% of All Deposit Service Charges Come from ODs
“Interchange revenue is significant, but at $30.8 billion in total revenue overdrafts still dominate. Even though debit card transactions exceed cash transactions, errors will happen with debit cards. Overdrafts reasonably priced provide a meaningful solution,” Moebs said.
Overdraft, Non-Sufficient Funds, Return of Deposited Item, Stop Payment, Line of Credit Transfer and Deposit Transfer Constitute All OD Revenue.
“Overdraft revenue is not limited to OD transactions. There are: non-sufficient funds, return of deposited items, stop payments, line of credit transfers and deposit transfers too,” reminded Moebs.
Your Grandma Bounces, Your Mom Swipes
“Grandma grew up with checks, which afforded making payments without money due to the float via mail which delayed the check just in time to be met with a paycheck deposit,” said Moebs. “Mom no longer has this old-fashioned process available and needs credit limits but not loans to help with cash shortfalls and errors. Grandma’s Christmas check is being replaced with e-gift cards.”
If You Don’t Like the Heat, Get Out of the Unsecured Kitchen
“If overdrafts should be penalized with high fee prices and low limits, since any type of unsecured credit is bad, then don’t do the service,” advised Moebs. “The bank or CU down the street will be happy to serve error-prone consumers with short-term cash needs.”
According to Moebs, “These 10 signs on the OD Highway require attention. Don’t forget to wear your seatbelts to avoid examiners, regulators, high fees, low limits, archaic underwriting and payday lenders—and help grandma if she gets on the OD Highway.”
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